Examiner’s report

Advanced Audit and Assurance (AAA)

September 2019

The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

General Comments

The examination consisted of two sections. Section A was a 50-mark case study placing the
candidate in the position of planning an audit while section B comprised two 25-mark questions,
one of which was set at the completion stage of the audit. All three questions were compulsory.

The purpose of the AAA examination is to enable candidates to demonstrate the skills required of a
professional auditor. These skills are tested in a range of contexts where a candidate is expected
to apply, rather than simply state knowledge. In order to demonstrate the skill required, candidates
are expected to be able to understand the underlying concepts and apply them to specific
scenarios set in different stages of the audit cycle or non-audit assignments. They also need to
appreciate the differences between scenarios from one session to the next. A rote-learnt answer
to past questions, or facts from a study text is unlikely to be sufficient to pass this examination.

Candidates are expected to have an understanding of the content of Audit and Assurance (AA)
and a strong understanding of financial reporting topics. All the standards examinable in the
Strategic Business Reporting (SBR) examination are also examinable in AAA. Without an
underlying knowledge of how to account for items in the financial statements it is not possible to
identify the audit risks arising from these or the specific assertions the audit procedures need to
address.

The syllabus and study guide set out the high level of understanding required for this examination
by using verbs such as analyse, critically assess, apply knowledge and evaluate. Candidates
should be able to synthesise and evaluate material. Simply listing knowledge without explaining its
relevance or purpose will not be sufficient to pass the exam. This is particularly important with
responses relating to procedures, where the purpose of the procedure must be given, and ethics,
where knowing the name of an ethical threat will not be awarded credit in its own right, rather
identifying the specific way in which the threat arises in a given scenario and the implication in that
specific case is required to attain credit.

Generally, the performance in the September 2019 examination mirrors that in previous AAA
examinations. Candidates find the application of knowledge difficult and often merely list points
without applying their knowledge to the scenario or fail to take note of the stage or type of audit or
assurance engagement in the question resulting in generic or irrelevant answers.

The most common weaknesses in underlying knowledge that are evident at each session are:

 A lack of basic double entry skills with candidates often confusing assets with liabilities or
assuming that if assets are overstated profit must be understated
 A lack of underlying knowledge of financial reporting
 An inability to make an appropriate materiality judgement
 Failure to understand the impact of issues on the auditor’s report

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Further details of these are given below in the question commentary.

Specific comments

Section A

Question One
This question was set at the planning stage of the audit for an existing client. The scenario
revolved around a long established group of companies audited by the same audit firm. The group
was undergoing restructuring with several proposed changes to group structure some of which
would not occur until after the year end.

There are four professional marks available in Question One. These are awarded as follows:

 1 mark for a suitable heading

 1 mark for an introduction – this need be no more than a short introductory paragraph
 1 mark for the structure of the answer, including the use of headings and paragraphs
 1 mark for the clarity of the candidate’s explanation

Candidates should refer to published answers for section A questions to understand how to
present a suitable heading.

Part (a) required candidates to describe audit risks arising in relation to the group audit and was
similar to the requirements seen in many past questions. Candidates generally appeared well
prepared for this question and were able to identify several audit risks and evaluate them in such a
way as to obtain a pass mark. When evaluating risks, candidates are advised to always bring in
specific references to the scenario, give the details of the accounting treatment required where
possible and the financial statement implications arising as a result of the audit risk. Candidates
should ensure they provide an appropriate calculation of materiality and a conclusion as to whether
an item is material or not material. Both of these are required for credit to be awarded.

Common issues arising on this requirement were as follows:

 Candidates giving rote-learnt risks with no application to the scenario, for example stating
that this was a new client (it was an existing client) or that a significant risk to a listed
company is management bias without referring to any specific bias drivers from the
scenario (e.g. to prove the success of a restructuring strategy, to maximise the sales price
for a subsidiary being disposed of) or demonstrating where the bias might impact on the
financial statements (e.g. the incorrect recognition of the grant received in profit or the
under amortisation of a three-year licence). Candidates must relate the audit risks to the
information provided which will be different in every examination.

 Candidates describing audit risks that were highly unlikely to be a genuine risk – for
example many candidates thought there was an audit risk that an acquisition planned for
next year might be included in this year’s consolidation in error or that a disposal the group
were hoping to make post year end required the company to entirely remove the assets

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 and liabilities from the consolidated financial statements and replace it with the profit on
disposal.

 Candidates not fully understanding the basic concepts of control or influence in the context
of group accounts, for example stating that a 50% shareholding means a company must be
a subsidiary. While a shareholding over 50% might be indicative that control exists or a
shareholding in the region 20-50% may indicate influence exists, the principles underlying
financial reporting are based on substance not just strict percentage rules.

Part (b) was a four-mark requirement regarding additional information required to plan the audit of
a disposal. This was well answered by candidates who appreciated that this did not relate to the
final audit procedures but information that could be requested in advance.

Part (c) required audit procedures regarding a government grant and the classification of an
investment in a joint venture. Generally, this requirement was well answered although common
errors with the requirement regarding the joint venture were to cover a wider scope than
classification or instead to give procedures for a totally different transaction from the scenario (e.g.
a common incorrect answer was to list procedures relating to the audit of the PPE investment in a
different group company). These errors arose from a lack of attention to the specific requirement.

Part (d) was a ten-mark ethics requirement and candidates’ answers tended to be weak here.
Many candidates simply listed the names of ethical threats without any application to the specific
scenario. This is disappointing given the specific guidance published on the ACCA website as to
what is required in terms of description for credit to be awarded in this area. Here candidates
demonstrated that they had learned a list of threats but failed to demonstrate that they understood
them or knew how they applied to a question. This was particularly apparent with regard to the
request that an audit partner take a temporary position on the audit committee. Many candidates
said this was a self-interest threat however they described it as arising because the partner would
be paid a fee rather than because the partner would then be involved in the choice of audit firm
and setting of the audit fee.

Candidates also demonstrated insufficient detailed knowledge of the IESBA International Code of
Ethics for Professional Accountants. Candidates often incorrectly stated that referral fees are not
permitted, but recommended the use of a separate team to devise and test controls over revenue
as an internal audit assignment which, for a listed company, is prohibited as revenues are a
material component of the financial statements.

Section B

Question Two
Question Two was set at the completion stage of an audit and proved difficult for many candidates.
In part (a) three property-related issues were described for an audit client of the firm and
candidates were required to analyse the matters to be considered (e.g. materiality, accounting
treatments permitted, how that applied to the client in question, potential errors) and the evidence
that would be expected on file in order to be able to conclude on the issues.

Topics covered were a sale and leaseback, where control had passed to the lessor, an investment
property and the reversal of an impairment relating to a property being used by the company.

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Very few candidates appeared to understand the concept of control underpinning the sale and
lease back – often candidates performed the appropriate test of considering the proportion of the
life of the property that would be leased back but then incorrectly concluded that renting the
property for one fifth of its life was effectively still owning the property. What was more concerning
was that a significant minority of candidates were still discussing the concept of operating and
finance leases and applying outdated accounting standards to a topic that has been examinable
under IFRS16 Leases for several sessions.

The investment property requirement was handled better and many candidates were able to
describe the option of holding the property at fair value with gains and losses being taken to the
statement of profit and loss. Many candidates though then went on to say the property should then
be depreciated or that it wasn’t an investment property despite not being owner occupied or used
within the business.

With regards to the impairment reversal, candidate performance was mixed. Many candidates
realised that the reversal would be restricted and were able to obtain credit even if they didn’t
appreciate that the reversal was not restricted to the previous impairment charge but should be
restricted to the written down value the asset would have had, had it not been impaired in the first
place. Beyond that however many candidates suggested that the excess value of that amount
could be recognised within Other Comprehensive Income which is not the case unless the
company is using a revaluation model rather than a cost model for properties.

Many candidates were able to identify relevant audit procedures for the above accounting issues.
In some instances this was the case even where they did not appear to fully understand the
accounting issues themselves.

Part (b) required candidates to consider the effect of the misstatements in the investment property
and the reversal of the impairment on the auditor’s report. Here candidates often assessed the
significance of the misstatement by reference to the entire asset value rather than the error
amount, resulting in the conclusion that an immaterial misstatement would result in an adverse
opinion. It was also common here that where a candidate calculated that the error was immaterial,
they would go on to conclude that it was in fact material. It is vital that candidates appreciate the
concept of materiality and are able to correctly apply it at this level.

As noted in previous sessions, there was a significant minority of candidates who concluded that
the immaterial misstatement should be disclosed in an emphasis of matter paragraph, again
demonstrating a lack of understanding of the concept of materiality and when the use of an
emphasis of matter paragraph is appropriate.

Question Three
This question was set in the context of a non-audit assignment for a non-audit client. Candidates
were asked to consider acceptance criteria for an investigative forensic appointment in response to
a fraud at a manufacturing company. The scenario detailed a fraud where inventory was stolen,
and the assignment was to quantify the fraud for an insurance claim. Most candidates
demonstrated the ability to apply acceptance criteria with reference to the specific question. A
minority of candidates discussed irrelevant considerations that appeared to have been learnt from
a previous question set in a similar context. Whilst the criteria for assessment were similar, some

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of those points were not relevant in this case and candidates wasted time in the exam discussing
issues that would only be relevant to an existing audit client.

Part (b)(i) of this question asked candidates to suggest the steps or procedures that could be used
to quantify the fraud and answers here tended to be either very good or very poor. Good answers
methodically went through the process of identifying the fictitious customer, extracting data on
cancelled orders and matching that to missing inventory through an inventory count. Weaker
candidates were those who approached this by listing pre-learned procedures or without taking in
to account the assignment and scenario. Such candidates often suggested tests that were based
on samples as would be relevant to an audit rather than trying to definitively quantify the loss.
Other mistakes made here were focusing on sale price rather than cost or trying to trace the stolen
inventory with reference to sales invoices despite the goods stolen not being invoiced. There was
evidence of candidates listing procedures from a previous forensic investigation question that were
not relevant to the scenario described and therefore could not be awarded credit.

Part (b)(ii) required candidates to identify and explain the deficiencies in controls that allowed the
fraud to occur and recommend improvements. Candidates were often able to score maximum
credit in this area by giving detailed explanations. Weaker candidates tended to identify the
deficiency from the scenario but were unable to describe how it resulted in the fraud or made
unspecific recommendations e.g. improve segregation of duties or someone should approve
cancellations – to obtain full credit more detail was required such as who should approve a process
or how duties should be segregated.

Part (c) required a discussion of factors making fraud hard to identify and was well answered by
candidates that completed it.

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